Question

Q4.

The 2021 income statement of Adrian Express reports sales of $20,710,000, cost of goods sold of $12,600,000, and net income of $1,980,000. Balance sheet information is provided in the following table.

ADRIAN EXPRESS Balance Sheets December 31, 2021 and 2020
	2021				2020
Assets
Current assets:
Cash	$	840,000			$	930,000
Accounts receivable		1,775,000				1,205,000
Inventory		2,245,000				1,675,000
Long-term assets		5,040,000				4,410,000
Total assets	$	9,900,000			$	8,220,000
Liabilities and Stockholders' Equity
Current liabilities	$	2,074,000			$	1,844,000
Long-term liabilities		2,526,000				2,584,000
Common stock		2,075,000				2,005,000
Retained earnings		3,225,000				1,787,000
Total liabilities and stockholders' equity	$	9,900,000			$	8,220,000

Industry averages for the following profitability ratios are as follows:

Gross profit ratio	45	%
Return on assets	25	%
Profit margin	15	%
Asset turnover	8.5	times
Return on equity	35	%

Required:
1. Calculate the five profitability ratios listed above for Adrian Express. (Round your answers to 1 decimal place.)

2. Do you think the company is more profitable or less profitable than the industry average?

• More profitable

• Less profitable

Q5.

The following condensed information is reported by Sporting Collectibles.

	2021				2020
Income Statement Information
Sales revenue	$	9,612,000			$	8,200,000
Cost of goods sold		6,305,472				5,700,000
Net income		348,880				228,000
Balance Sheet Information
Current assets	$	1,580,000			$	1,480,000
Long-term assets		2,180,000				1,880,000
Total assets	$	3,760,000			$	3,360,000
Current liabilities	$	1,180,000			$	880,000
Long-term liabilities		1,520,000				1,520,000
Common stock		780,000				780,000
Retained earnings		280,000				180,000
Total liabilities and stockholders' equity	$	3,760,000			$	3,360,000

Required:
1. Calculate the following profitability ratios for 2021: (Round your answers to 1 decimal place.)

2. Determine the amount of dividends paid to shareholders in 2021.

Q6.

The following income statement and balance sheets for Virtual Gaming Systems are provided.

VIRTUAL GAMING SYSTEMS
Income Statement
For the year ended December 31, 2021
Net sales				$	3,051,000
Cost of goods sold					1,953,000
Gross profit					1,098,000
Expenses:
Operating expenses	$	861,000
Depreciation expense		28,500
Loss on sale of land		8,300
Interest expense		16,500
Income tax expense		51,000
Total expenses					965,300
Net income				$	132,700

VIRTUAL GAMING SYSTEMS
Balance Sheets
December 31
	2021				2020
Assets
Current assets:
Cash	$	189,000			$	147,000
Accounts receivable		84,000				63,000
Inventory		108,000				138,000
Prepaid rent		12,300				6,360
Long-term assets:
Investment in bonds		108,000				0
Land		213,000				243,000
Equipment		273,000				213,000
Less: Accumulated depreciation		(73,500	)			(45,000	)
Total assets	$	913,800			$	765,360
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	69,000			$	84,000
Interest payable		6,600				3,300
Income tax payable		16,500				14,300
Long-term liabilities:
Notes payable		288,000				228,000
Stockholders' equity:
Common stock		303,000				303,000
Retained earnings		230,700				132,760
Total liabilities and stockholders’ equity	$	913,800			$	765,360

  

Required:

Assuming that all sales were on account, calculate the following risk ratios for 2021. (Use 365 days a year. Round your final answers to 1 decimal place.)
  

Answer 1

Q4

1.

(a) Computation of Gross Profit Ratio

Gross Profit Ratio = Gross Profit/Sales

Particulars		2021
Sales	A	$20,710,000
Cost of goods sold	B	$12,600,000
Gross Profit	C=A-B	$8,110,000
Gross Profit Ratio	D=C/A	39.16%

(b) Computation of Return on total assets

Return on total assets = Net Income / Average total Assets

Particulars		2021
Opening Assets	A	$8,220,000
Closing Assets	B	$9,900,000
Average Total Assets	C=(A+B)/2	$9,060,000
Net Income	D	$1,980,000
Return on total assets	E=D/C	21.85%

(c) Computation of Profit margin ratio

Profit margin ratio = Net Income/Net sales

Particulars		2021
Net Income	A	$1,980,000
Net Sales	B	$20,710,000
Profit margin ratio	C=A/B	9.56%

(d) Computation of Asset Turnover Ratio

Asset Turnover Ratio = Net Sales/Average Total Asset

Particulars		2021
Net Sales	A	$20,710,000
Average Total Asset	B	$9,060,000
Asset Turnover Ratio	C=A/B	2.29

(e) Computation of Rate of return on common shareholder Equity

Return on common shareholder Equity = Net Income/Average Common shareholder Equity

Particulars		2021
Opening Common shareholder Equity	A= 2,005,000+1,787,000	$3,792,000
Closing Common shareholder Equity	B= 2,075,000+3,225,000	$5,300,000
Average Common shareholder Equity	C=(A+B)/2	$4,546,000
Net Income	D	$1,980,000
Return on common shareholder Equity	E=D/C	43.55%

2. The company is underperforming as compared to Industry as all the ratios except the return on equity as calculated above are less than the industry's average.

Therefore, the company is less profitable than the industry average.

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